Menu

Comparing Information Technology Stocks

I’m not reviewing every stock in the IT sector on the TSX, but seven is enough to appreciate the similarities and differences and get an idea of where the opportunities may lie. You can see that many of them have earnings that are more volatile and returns that are less predictable than Financials. Like last time, I don’t own or plan to buy any of these.

Blackberry

Symbol: BB on the TSX. The price at Monday close was $9.85, which is near the 52-week low of $7.99 (undervalued). (Chart.) The price is -0.20% lower than last week’s price ($9.87), and -22.75% lower than last month’s price ($12.75), and -26.71% lower than the price one year ago ($13.44). The company pays no dividend. The P/E ratio is negative / meaningless. The Price/Book ratio is 1.50, below the 10 year average of 4.01 (undervalued). Market capitalization is $5.13B (large cap).

This stocks doesn’t make sense to buy within either a value or momentum strategy. Over the past 10 years, earnings per share have been falling, with a 10 year average of $0.72 and most recent earnings per share of $-0.58. Earnings have been volatile. Any price projection would be meaningless, since the projected earnings are negative.

CGI Group

Symbol: GIB.A on the TSX. The price at Monday close was $60.35, which is a new 52-week high (overvalued). (Chart.) The price is 8.72% higher than last week’s price ($55.51), and 11.43% higher than last month’s price ($54.16), and 14.06% higher than the price one year ago ($52.91). The company pays no dividend. The P/E ratio is 19.72, above the 10 year average of 16.96 (overvalued). The Price/Book ratio is 2.91, above the 10 year average of 2.36 (overvalued). Market capitalization is $18.65B (large cap).

Although this stock is attractive within a momentum strategy, it’s hard to see how much higher the price can go. Earnings per share are positive and have tended to rise. I have extrapolated a 5-year target price of $63.16, wide range: $32.10 – $241.55, tight range: $45.87 – $71.80. Growth from the recent price of $60.35 to $63.16 would represent an annual compound return of 0.91% per year (wide range: -11.86% to 31.97%, tight range: -5.34% to 3.54%).

Computer Modelling Group

Symbol: CMG on the TSX. The price at Monday close was $9.40, which is near the 52-week low of $7.67 (undervalued). (Chart.) The price is 18.24% higher than last week’s price ($7.95), and 6.09% higher than last month’s price ($8.86), and -23.01% lower than the price one year ago ($12.21). The current yield is 4.26%, which is above the 10 year average of 3.37% (undervalued). The P/E ratio is 22.46, below the 10 year average of 26.07 (undervalued). The Price/Book ratio is 12.27, near the 10 year average of 11.98 (fairly valued). Market capitalization is $723.35M (small cap).

This doesn’t appear to present either value or momentum. Earnings per share are positive and have been fluctuating. I have extrapolated a 5-year target price of $20.46, wide range: $5.36 – $25.37, tight range: $18.02 – $21.68. Growth from the recent price of $9.40 to $20.46 would represent an annual compound return of 16.83% per year (wide range: -10.63% to 21.97%, tight range: 13.91% to 18.19%), plus a dividend cash-on-cash yield of 5.32% (average per year, simple return, not guaranteed).

Constellation Software

Symbol: CSU on the TSX. The price at Monday close was $512.26, which is midway between the 52-week low of $355.11 and the 52-week high of $598.00 (fairly valued). (Chart.) The price is -0.92% lower than last week’s price ($517.04), and -7.80% lower than last month’s price ($555.61), and -9.57% lower than the price three months ago ($566.48), and -11.45% lower than the price six months ago ($578.49), and 19.18% higher than the price one year ago ($429.83). The current yield is 0.78%, which is below the 10 year average of 0.96% (overvalued). The P/E ratio is 71.35, above the 10 year average of 62.51 (overvalued). The Price/Book ratio is 36.89, above the 10 year average of 20.32 (overvalued). Market capitalization is $10.75B (large cap).

This one has some momentum, but again it is difficult to imagine it being a profitable trade. Earnings per share are positive and have tended to rise. I have extrapolated a 5-year target price of $427.40, wide range: $0 – $1,196.02, tight range: $256.60 – $512.80. Growth from the recent price of $512.26 to $427.40 would represent an annual compound return of -3.56% per year (wide range: total loss to 18.48%, tight range: -12.91% to 0.02%), plus a dividend cash-on-cash yield of 1.04% (average per year, simple return, not guaranteed).

Enghouse Systems

Symbol: ESL on the TSX. The price at Monday close was $59.51, which is midway between the 52-week low of $39.71 and the 52-week high of $77.54 (fairly valued). (Chart.) The price is 0.27% higher than last week’s price ($59.35), and -18.48% lower than last month’s price ($73.00), and 22.78% higher than the price one year ago ($48.47). The current yield is 0.74%, which is below the 10 year average of 0.96% (overvalued). The P/E ratio is 50.41, above the 10 year average of 31.83 (overvalued). The Price/Book ratio is 6.50, above the 10 year average of 3.45 (overvalued). Market capitalization is $1.57B (mid cap).

Earnings per share are positive and have tended to rise. I have extrapolated a 5-year target price of $73.93, wide range: $23.50 – $104.67, tight range: $58.14 – $81.82. Growth from the recent price of $59.51 to $73.93 would represent an annual compound return of 4.43% per year (wide range: -16.96% to 11.96%, tight range: -0.47% to 6.57%), plus a dividend cash-on-cash yield of 0.93% (average per year, simple return, not guaranteed).

Macdonald Dettwiler

Symbol: MDA on the TSX. The price at Monday close was $86.80, which is midway between the 52-week low of $70.55 and the 52-week high of $101.42 (fairly valued). (Chart.) The price is -1.14% lower than last week’s price ($87.80), and 4.65% higher than last month’s price ($82.94), and -10.66% lower than the price one year ago ($97.16). The current yield is 1.50%, which is above the 10 year average of 0.86% (undervalued). The P/E ratio is 32.31, above the 10 year average of 26.14 (overvalued). The Price/Book ratio is 2.92, below the 10 year average of 4.85 (undervalued). Market capitalization is $3.11B (mid cap).

This is a momentum stock. Earnings per share are positive and have been fluctuating. I have extrapolated a 5-year target price of $52.15, wide range: $0 – $182.72. Earnings are too volatile to have confidence in a tighter range. Growth from the recent price of $86.80 to $52.15 would represent an annual compound return of -9.69% per year (wide range: total loss to 16.05%), plus a dividend cash-on-cash yield of 2.03% (average per year, simple return, not guaranteed).

Open Text

Symbol: OTC on the TSX. The price at Monday close was $68.25, which is near the 52-week high of $76.71 (overvalued). (Chart.) The price is 1.38% higher than last week’s price ($67.32), and 2.74% higher than last month’s price ($66.43), and -4.63% lower than the price one year ago ($71.56). The current yield is 1.05%, which is above the 10 year average of 0.58% (undervalued). The P/E ratio is 39.51, above the 10 year average of 29.77 (overvalued). The Price/Book ratio is 4.55, above the 10 year average of 2.88 (overvalued). Market capitalization is $8.20B (large cap).

Another momentum stock. Earnings per share are positive and have tended to rise. I have extrapolated a 5-year target price of $77.26, wide range: $61.41 – $519.60, tight range: $71.50 – $80.13. Growth from the recent price of $68.25 to $77.26 would represent an annual compound return of 2.51% per year (wide range: -2.09% to 50.08%, tight range: 0.94% to 3.26%), plus a dividend cash-on-cash yield of 1.33% (average per year, simple return, not guaranteed).

Conclusion

Now I understand the reason investors value highly stable, highly predictable earnings, as well as regular, steady dividends. These companies are more difficult to predict, but some of them also have very fast-growing earnings. I wouldn’t suggest these as the “core” part of a portfolio, but they could make up the “explore” portion. I would probably prefer Computer Modelling Group, given that the price has more room to increase before hitting the 52-week high, and Constellation Software, which would present a decent return if it returns to its 52-week high in under five years. But I wouldn’t commit too much capital to these, and I would look to diversify it with other investments. Due to the momentum strategy, I’d also monitor them closely, especially looking to take profit as they near their targets.

Twitter

Contact Details

In an effort to minimize cost to clients, I have not set up a physical office. I can meet with you at your office, at your home, at a coffee shop, at a public library or using video conferencing (Google Hangouts)